Portfolio Review


Corporate roundup

In the October quarter, Kroger ($40; KR) grew earnings per share 15% to $0.53 excluding special items to match the consensus estimate. Total revenue rose 3% to $22.51 billion, while same-store sales excluding fuel advanced 3.5%, marking the 40th consecutive quarter of growth. Management reiterated its full-year guidance and said it expects same-store sales to climb 3.0% to 3.5% in the January quarter. However, Kroger noted higher volatility in weekly sales, partly due to uncertainty over consumer costs associated with the new federal health reform and reduced funding for food stamps.

Shares fell on the results, though they remain up 22% since we first recommended Kroger in late March, ahead of the 15% gain for the S&P 1500 Index. At 14 times trailing earnings, the stock trades 33% below the median for food retailers in the S&P 1500. Revenue is on pace to increase for the 27th consecutive year, a track record that reflects moderate inflation, consistent organic growth, and a smattering of acquisitions. Kroger is a Focus List Buy and a Long-Term Buy.

Celgene ($171; CELG) shares hit another record high after the biotechnology company reported promising clinical data for a pair of drugs. Revlimid (66% of Celgene's total sales for the nine months ended September) was found effective as a long-term maintenance drug for multiple myeloma, a type of blood cancer. The results could increase the duration that patients use Revlimid and help pave the way for wider approval in the U.S. and Europe.

In a separate study, Celgene announced encouraging results for Pomalyst (4% of sales) for patients with refractory multiple myeloma. The stock has soared 118% so far this year, dragging down its Value score to 22. Shares trade at a lofty 30 times trailing earnings, still 13% below the median for S&P 1500 biotechnology stocks. Celgene is a Long-Term Buy.

With consolidation on the tip of cable executives' tongues, Comcast ($49; CMCSa) has reportedly hired J.P. Morgan Chase ($57; JPM) as an adviser for a potential bid for rival Time Warner Cable ($132; TWC). However, an official at the Federal Communications Commission told The Wall Street Journal that an outright deal between Comcast and Time Warner Cable would likely find little support with regulators. Even without a deal, Comcast should generate solid organic growth. Per-share profits are projected to jump 31% in the December quarter on 4% higher revenue, and the upcoming winter Olympics could sustain momentum in the March quarter. The stock scores in the top 35% of our research universe for all six Quadrix categories, while also scoring above 80 for both sector-specific scores. Comcast is a Buy and a Long-Term Buy. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy.

Drug prices under pressure

Two separate moves announced in December could squeeze prices for drugmakers. CVS Caremark ($68; CVS) and drug distributor Cardinal Health ($66; CAH) announced a 10-year partnership, making them the biggest source of generic drugs in the U.S. That scale will give the companies considerable purchasing power and could limit the ability of generic-drug makers to raise prices. Cardinal will pay CVS $25 million each quarter over the length of the deal.

Other drug distributors, including AmerisourceBergen ($70; ABC) and McKesson ($160; MCK), have also made moves this year to improve their position in negotiating drug prices. Shares of generic-drug maker Mylan ($43; MYL) fell on the news. Mylan is a Focus List Buy and a Long-Term Buy. CVS Caremark is a Buy and a Long-Term Buy. McKesson is rated A (above average). Amerisource is rated C (below average).

Express Scripts ($68; ESRX) vowed to pit drugmakers against each other to keep prices down on a new wave of hepatitis C drugs to hit the market in 2014 and early 2015. As a pharmacy-benefits manager, Express Scripts can determine which drugs get reimbursed or receive lower co-payments. Hepatitis C treatments by Gilead Sciences ($73; GILD) and AbbVie ($52; ABBV) could cost $1,000 per pill.

Express Scripts also announced an accelerated share-repurchase plan; it will pay Bank of America ($16; BAC) $1.5 billion for more than 20 million shares, about 2.4% of outstanding stock. Express Scripts is a Buy and a Long-Term Buy. AbbVie, Bank of America, and Gilead Sciences are rated B (average).

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